Disguised remuneration 'loan charge'

News Article

In this update we clarify some important issues relating to the proposed disguised remuneration ‘loan charge’ due to come into effect in April 2019. This clarification comes following our recent communication with HMRC Policy. If you have clients who have outstanding EBTs, EFRBs or similar arrangements, please read this update.

Background

Many of our clients (and fellow tax advisors) are becoming aware of the proposed new legislation which will seek to tax most outstanding loans from ‘disguised remuneration’ structures (“the loan charge”) from April 2019. Our previous update looked at the shape of things to come in HMRCs continued ‘war on tax avoidance’.

Increasingly, we’re being asked whether this new legislation means that clients should seek to settle with HMRC now or wait until April 2019 and simply pay the loan charge.

In answering this question, we sought clarification on a number of areas from HMRC Policy personnel responsible for the new legislation. Specifically;

If a client pays the loan charge in April 2019 will this mean an end to any HMRC claims for PAYE/NIC due from the structure?

As the loan charge applies to the same underlying income, the double taxation relief provisions give credit for the amount of tax paid against the earlier liability. Where the loan charge liability is lower than the earlier liability, perhaps because only a small proportion of the contribution was loaned out, the remainder of the tax and NICs will still be due. Similarly, as the original liability is undisturbed, the late payment interest is also still due. Where the loan charge liability is greater than the earlier liability, the excess can be used as a payment of the interest.

If the employer/company pays the loan charge in 2019 could S222/S223 ITEPA 2003 also apply to this amount (ie. could there be an additional liability on a 'gross up' basis)?

HMRC Policy has confirmed that because the legislation deems the loan charge to be a Part 7A charge (ITEPA 2003) this means that it falls within the provisions of s222 and s223. As a result, if an employer pays the loan charge on behalf of its directors or employees, this may well have to be paid on a ‘gross up’ basis unless the tax is ‘made good’ or repaid by the individual to the company.

If a client pays the loan charge in April 2019, what will this mean for the outstanding structure and underlying dispute or HMRC enquiry?

It has been confirmed that the loan charge doesn't affect existing and historic enquiries or assessments.

What does this mean for clients?

It seems clear from our discussion with HMRC that waiting till April 2019 and paying the loan charge could prove to be an expensive option. For example, at present HMRC is prepared to settle most EBT structures without insisting on payment being made on a ‘gross up’ basis which can mean a potentially significant saving for many clients. If clients wait until 2019 then this outcome may not be achievable.

Also for clients wanting certainty and finality, it seems that paying the loan charge is unlikely to achieve this objective. They will still be left with an open enquiry and dealing with any further tax charges (e.g. IHT) which HMRC may allege is due to any interest on the original claim for PAYE/NIC.

Based on this, our advice to clients is to seek to explore settlement with HMRC before the new rules comes into effect and compare this with the cost of paying the loan charge. By going through this process, clients are in a better position to make an informed decision on the best way forward for them.

If you have any clients with outstanding structures or schemes and would like an independent and objective review, please contact us. We have successfully resolved a large number of different structures on behalf of clients and so understand the technical issues and the nuances of HMRCs settlement terms.

If you have clients who might benefit from a review of their arrangements or believe they may have historic tax issues please contact us.

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At Pannu Tax you will be advised by some the UK's leading tax investigations and dispute specialists who have the practical experience and the technical knowledge required to provide you with the type of effective support you need.

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For a free, confidential and no obligation discussion call us on 0800 246 5915 or email us direct at info@pannutax.co.uk


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